Eurozone government bond deals back on the boil

Reuters Staff

5 Min Read

* Rally fuels hope for strong bond issuance window

* Rates stability could favour long-dated issuance

* Finland widely tipped to kick things off

By Abhinav Ramnarayan

LONDON, Aug 11 (IFR) - After months of indifferent activity, European government bond markets are in fine fettle this week with the positive news on a third Greek bailout which raised hopes that eurozone sovereign syndications may be easier to execute.

Germany’s benchmark 10-year Bund this week led a eurozone sovereign bond rally and had tightened 8bp to a bid yield of 0.59% by Wednesday morning, according to Tradeweb.

The rally followed reports that Greece and its creditors had agreed terms for a third bailout that will keep the beleaguered nation solvent over the next three years.

This has led many to believe that the bouts of volatility that hit eurozone government bonds in recent weeks may abate for the foreseeable future.

“We forecast that over the third quarter of the year, German Bunds, and other eurozone government bonds, such as Italy and Spain, will be fairly rangebound,” said Michael Spies, interest rate strategist at Citigroup.

“The flight-to-quality bid as a result of events in China, the easing of the Greek crisis and low inflation are all factors that have proved positive for EGBs, and you have seen German Bunds rally 20bp-25bp over the last month,” he said.

Earlier this year, the European Central Bank’s quantitative easing programme pushed core European bonds so tight that several real money investors left the sector altogether.

Severe volatility in the months that followed because of QE distortions and continued uncertainty over Greece made primary issuance even more challenging towards the tail-end of H1.

However, the outlook for primary issuance looks a lot more rosy with prices having backed up to some extent and volatility expected to abate.

“In euro, there are signs that prices have sort of stabilised around the levels at which investors might be now willing to buy,” said Raffaele De Vitis, a syndicate official at Credit Agricole.

“If we have some resolution on the Greek debt crisis - and it looks like some agreement will be reached pretty soon - then we will likely not have the big sell-offs like we have seen this year so far,” he said.

LONG PIPELINE

As IFR has reported throughout this year, several eurozone issuers have been rumoured to be considering the issuance of bonds in the second half of 2015. Potential issuers are Finland with a 10-year bond, France and Belgium with ultra-long dated paper, Italy with a 15-year inflation-linked bond and Spain with a 30-year.

Finland is widely expected to open proceedings and is rumoured to be a candidate for a late August deal. The other transactions are more likely to depend on market conditions - most notably on the longer-dated trades - though the signs are good at the moment.

“There is more stability in underlying rates, which should mean that some of the big euro investors are able to take pragmatic investment decisions; the hurdle for them before was the volatility,” said Kerr Finlayson, SSA syndicate official at RBC.

In a volatile market, the bid for duration disappeared as wary investors focused on the front end. This week, however, some of the longer-dated bonds have improved.

France’s 4% April 2060 note, for example, has tightened 3bp so far this week to breach the 2% level and was bid at 1.98% at midday on Wednesday. Spain’s 5.15% October 2044 was in a dramatic 16bp to 2.82% over the same period, according to Tradeweb.

The latter note is now at the same level it was in January this year, when the real money bid for peripheral duration was strong; a bid that disappeared as spreads compressed and the market subsequently turned more defensive.

There are still potential hurdles ahead: there are elections coming up in Spain and Portugal, while the Greek bailout programme will depend on the country’s ability to stick to a tough reform programme.

“But the broader dynamic is that there will be demand at these kind of levels; and with less volatility expected, at least in the short term,” said Finlayson. (Reporting By Abhinav Ramnarayan; Editing by Philip Wright and Luzette Strauss)